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IGST relief likely for foreign banks MNCs

The government may be looking to give some respite to foreign banks and multinationals which are saddled with the additional cost of paying 18% integrated goods and services tax (IGST) on the services provided to their international offices, said two people close to the development.

An advisory to this effect may be issued by the tax department in the coming weeks, one of the persons cited earlier said, requesting not to be named.

“The tax officials realise that this (tax on multinationals) is an unintended consequence, and this could get resolved in the coming weeks,” the other person said.

Under the GST framework, a multinational — especially a foreign bank or infrastructure company — that has a branch or operation in India, has to pay IGST. Many foreign banks have already started paying 18% IGST to avoid any litigation. This tax liability has emerged under the GST framework as it considers services provided by one branch to another as interstate supply.

Tax experts point out that while the current law mainly impacts foreign banks and multinationals which have liaison offices in India, many Indian banks would also be impacted.

“Impact of this provision is very wide and extends to liaison offices or any other branch which renders services to its parent outside India. Also, any head office which renders services from India to its branch located in any other country will be impacted,” said Abhishek A Rastogi, partner, Khaitan & Co.

According to people in the know, some top public-sector banks are consulting their lawyers in this regard. “The concern is that they would also be required to pay the IGST in cases where services are provided to foreign branches,” said a person close to a PSU bank.

“This particular issue also affects project and liaison offices of many other multinational companies, including those in the infrastructure sector. The issue has already been flagged off to the government and one would hope for a quick resolution, else it would lead to a long-drawn litigation,” said Pratik Jain, national leader, indirect tax, PwC India.

ET had reported on September 29 that DBS Bank has filed a writ petition in the Delhi High Court challenging the IGST levy.

Tax experts point out that it may prove to be a tiring exercise for Indian tax authorities if they demand tax on such transactions. “The question is why the recipient head office or branches that are located outside India should bear such a cost when they do not fall under Indian tax authority’s jurisdiction,” said Sachin Menon, head, indirect tax, KPMG India. “

“If this clause continues, India will lose business.”

A senior tax official had earlier told ET that the government is “mindful of some situations where the GST has had an adverse impact”. In the last one week, a group of senior tax officials has met some tax experts to know industry- specific pain points in GST.

The focus was on all the issues that were raised by companies, banks and associations by filing writ petitions in courts. According to tax experts, the absence of an advance ruling authority is leading to many companies and associations dragging the GST Council and the government to court.

According to experts, in some cases, like in the case of IGST on supply of services to head offices outside India, there could be issues around constitutional validity. “The place of provision of these services is outside of India and, hence, it appears that unintended ambiguity has crept in, unlike in the earlier tax regime. The IGST provisions don't have the power to levy tax on such transactions and constitutional validity has to be tested in the courts,” said Rastogi.

The Economic Times, New Delhi, 26th October 2017

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